Make Money Online

Pay Grandma Using Your Kids’ 529 Plan

“My Mom bought groceries for our son when she visited him on campus last week,” a parent asked me recently, “Can we take a withdrawal from our 529 plan to pay her back?”

529 plans are tax-advantaged college investment accounts sponsored by states and institutions. Assets and distributions receive preferred treatment when considered in the federal financial aid formula. They also offer benefits ranging from state tax incentives to estate planning.

It can be a little confusing, however, about what qualifies when it comes to making a withdrawal, and for whom that withdrawal can be made, especially when the answer to the aforementioned question is, “Yes.”

How 529 Withdrawals Work

Every 529 account has an owner and a beneficiary. The account owner can take tax-free withdrawals from their account for QHEE’s (Qualified Higher Education Expenses), such as tuition, fees, room, board, and certain technology incurred by the beneficiary. Taking a withdrawal to pay for your child’s tuition is pretty straightforward, but other expenses are less so. What about subway fare to get to and from class? Or hockey equipment? And what if two people have accounts for the same beneficiary?

Let’s say you and I both have 529 accounts for your child Chris, who is entering his second year at MIT. I am not related to you, but we’re practically family and I want to help Chris out. Studying astrophysics is expensive: The cost of attendance for the 2021–2022 academic year is $77,020 (seriously). Parents are increasingly responsible for the lion’s share of college costs, but for simplicity let’s say a third is covered by scholarships and grants, another third by Chris’s own savings, loans, and a work-study program, leaving us with the remaining third, or $25,647, to cover.



Transportation – Chris and I get a Uhaul to get all his stuff to campus for about $200 between rental costs, mileage, and gas. I pay for it. Unfortunately, transportation such as airfare, a new car, bus fare, etc. – even if required to attend the school – is a non-qualified expense, so it cannot be reimbursed from a 529 account.

Rent – Chris pays $6,000 for rent in the first four months (split with roommates), or about $1,500 a month for Sept – Dec of the 21–22 school year. One of us can take a qualified distribution for the expense, but only up to the housing allowance as calculated by the school, which caps out at $1,283 per month (see “Housing,” below).

Scholarships – Chris uses $15,000 of tax-free scholarship money towards tuition. Either – but not both – of us may take a distribution in the amount of the scholarship in the year the scholarship is received by Chris. Normally there is a penalty tax on non-qualified withdrawals, but scholarships are an exception. We would still be responsible for tax on the earnings portion of the withdrawal, and all 529 withdrawals include an earnings portion. Note also that any expenses paid for with the scholarship cannot be used to make a 529 withdrawal.

Third-Party Payments – Grandma buys Chris groceries one week and spends $300. One of us can take a distribution in the amount of the groceries, which would be considered “board.” While grandma paid, the expense was incurred for the benefit of Chris, so a qualified event has occurred.

Computer and Internet – You buy Chris a new laptop for $1,000 and pay their first month’s internet service bill of $30. Computers and internet service charges are both qualified expenses. You can take a withdrawal or, if for some reason you do not want to take a withdrawal or have run out of funds, I can take a withdrawal and reimburse you since the expense was ultimately for the beneficiary.

College Store – Chris buys $300 worth of college swag from the store, like a logo sweatshirt and college-branded notebooks. Sadly, most swag is not a QHEE, though if Chris itemizes their spending between supplies and clothes, you can claim qualified items like notebooks, pens, etc. A college sweatshirt is not a qualified expense, though.

Fees – I paid $500 of university fees out of pocket for Chris, but my 529 account has been depleted. You can make a qualified withdrawal from your account for $500 for the purposes of reimbursing me. So long as you can tie the expense to a qualified event for the beneficiary and it was not covered by another tax-advantaged account or benefit, it’s qualified.

How Much Can You Cover For Housing If They Live On Or Off Campus?

When determining qualified expenses it’s important to know the school’s estimated Cost of Attendance. In this case, MIT’s cost of attendance for 2021–22 is $77,020, and the housing portion of that cost is $11,550. That’s an allowance of $1,283 per month of rent over the course of a school year (Sep – May). If the student lives in school-supplied housing the actual cost can be claimed, but off-campus is limited to the housing portion of the Cost of Attendance. This is to prevent abuse of 529 plans. For example, account owners could charge their kids rent and get tax-free distributions at the same time without the rule.

No Double-Dipping!

You cannot claim expenses which were paid for using already tax-advantaged dollars. This is called the “anti-double-dipping rule.” This is why you cannot use 529 dollars to pay for expenses paid for with scholarship money.

The $300 from grandma is a QHEE and it can be claimed by either 529 account owner, but not both. This can be applied to any qualified expense: Either 529 account owner can withdraw said amount with the idea being they are reimbursing Chris, Grandma, or whoever else incurred the QHEE. It doesn’t matter that I cut that check for $3,000 with the intent of Chris using it to pay rent. You could still make a $3,000 withdrawal from your 529 account and reimburse me for the expense, because the beneficiary is Chris, who is ultimately responsible for paying the rent. So long as you can tie the withdrawal to a QHEE of the beneficiary it is a qualified withdrawal. If there is more than one account it is between the account owners – who are ultimately responsible for proving expenses qualified or otherwise – to determine who will make a withdrawal for the respective expense.

Important: Timing!

529 withdrawals should be taken in the same calendar year in which the expenses are incurred. You do not want to take $1,500 out in January for December rent. While unlikely, this could be construed as a non-qualified withdrawal by the IRS in the event of an audit.

More Information

For withdrawals, check out, “How To Make Withdrawals From Your 529 Plan.”

For qualified expenses, check out, “What’s A Qualified Higher Education Expense?

Brian Boswell is a registered representative of and offers securities through MML Investors Services, LLC. Member SIPC., 101 Federal St, Suite 800, Boston, MA 02110. Tel: 617-439-4389. CRN202410-1003844.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button